LEADING THE WAY OUT OF THE EU

Deal or No Deal

Leave.EU’s CEO Liz Bilney spells out why panic over a no deal scenario in the Article 50 negotiations is not only overblow, but plain wrong.

The starting pistol is fired, the negotiations towards Britain’s departure from the European Union have finally begun. Following an unsatisfying general election, Remainer cries for the government to strike a more conciliatory tone with the EU has become deafening. Their anger is concentrated on the famous line from Theresa May’s Lancaster House speech, “no deal is better than a bad deal”.

On the Andrew Marr show, Chancellor Philip Hammond was asked to explain his leader’s logic. Rather puzzlingly, he started by asserting that a no deal scenario would not be ideal, but a bad arrangement, one “deliberately designed to punish us, to suck the lifeblood out of our economy” would be worse. “Remainer” Hammond’s line of reasoning was completely back to front. Yes, a bad deal could be very bad indeed, betraying all the promises made during the referendum, open borders, massive payments to the EU coffers, you name it, but a “no deal” is at worst, benign, at best, a fabulous opportunity for a fairer more prosperous Britain.

We voted for this

In hitting us over the head so remorselessly with project fear campaign, David Cameron and George Osborne can at least be thanked for clarifying what Brexit means. They as much as Leave.EU and Nigel Farage told voters that leaving the EU means exiting the Single Market and its ever-increasing annual membership fee, ditching political and economic union, and restoring immigration controls along with national sovereignty.

It was made equally clear that a clean split would follow one of two courses: a conventional trade deal between the UK and the EU, such as existing deals with the likes of Mexico, South Korea and now Canada, or reverting to rules and rulings made by the World Trade Organization (WTO). Note that, as an EU member state, the UK is already a member of the WTO. Its President, Roberto Azevêdo has already guaranteed that Britain will be granted full membership status. The EU currently conducts almost all business in the WTO on the UK’s half.

Anything more ambitious is likely to incur compromises betraying the promises made during the referendum: stay in the Single Market and remain stuck with free movement of persons, job-killing EU regulations and EU courts; or stay in the Customs Union and kiss goodbye to an independent trade policy that could transform this island nation’s economy with the assistance of its enviable links with the Commonwealth.

So a bad deal, certainly in my mind, if not the Remain voting Chancellor, would be to give up on any these pledges. Just because our Remain campaigners did not get the economic collapse they predicted in the event of a Leave vote, does not mean British voters cannot reap the benefits of full

Duty calls

Amongst other things, the European Union is a free trade area, meaning exporters in the EU do not have to pay a duty (also known as a tariff) on the goods they sell to other EU members, plus other countries who have agreed a special trading arrangements such as Norway, Turkey and Switzerland. In the event of a no deal, the United Kingdom would find itself entirely out of the bloc with exporters facing tariffs for the first time in forty-six years, a brave new world for EU businesses to adjust to I should add.

But not that brave for the UK side. EU import duties are low. According to the World Trade organisation, its average tariff is a mere 5.%, compared to Australia (9.9%), Canada (6.8%) and China (10%). If we add this tariff to the total value of EU-bound UK exports, which came to £143bn in 2016, British exporters would have paid approximately £7bn in duties. Not exactly small change, but well below the UK’s net transfers to the EU – 10.7bn in 2015/16.

So, even before we factor in the gains to the UK Treasury of imposing import duties on the EU’s much higher volume of goods, a clean Brexit featuring no annual payments to Brussels will put the UK economy in credit to the tune of £3.7bn, and that’s before we’ve examined the different ‘weightings’ to apply to the average EU tariff.

The WTO’s weighted average of EU tariffs is just 2.7%, which translates to £3.9bn in tariff receipts. The weighting is based on those goods that are imported in higher quantities. For instance, the EU places low or no tariffs on those commodities upon which its economy depends and has no domestic supply of. Natural gas, which the EU economy cannot source domestically in high enough quantities is therefore duty free. Imported cars on the other hand are charged a 10% duty, native production is extremely high and EU Member States are eager to disincentivise imports.

Fig. 1: Average final bound tariff rates applied by the EU by broad category of goods

Using WTO and ONS data (see figures 1 and 2), Leave.EU has calculated on a good-by-good basis the EU’s average weighted tariff for UK imports: between 4% and 7% on aggregate (£5.5-£10bn). If we apply the same percentages to UK imports of EU goods, which mirror almost identically the UK export mix, the UK Treasury would expect to receive between £9bn and £17bn, assuming the UK decided to hold onto the tariff regime currently imposed by Brussels.

Businesses argue that an extra couple of percentages digging into margins in the form of duty receipts can be the difference between a profitable enterprise and an insolvent one. Business lobbies have a history of exaggerating their plight. Still, there is a strong argument for those exporters falling victim to the sudden imposition of onerous tariff barriers to (see figure 1) to receive government funded support. Vehicles, chemicals, textiles and agriculture – depending on the level of subsidy – are the obvious candidates for the government to cover the cost of EU duties.

Such a policy would constitute a subsidy in itself, the very thing the WTO exists to stop. National governments have a tendency to help domestic businesses become more competitive by handing out subsidies. The WTO’s role is to stop them from dishing them out and create as level an international trading playing field as possible. However, the subsidies in the organisation’s sites are those that are designed to distort trade on a massive scale, not the kind being proposed here.

The WTO functions on a litigation basis. Other members have to lodge a case with the organisation’s dispute settlement procedure. The litigator is required to build a convincing picture of how the flow of goods would look without the subsidy. Unless the subsidy is absolutely huge and targets a small section of the market – one geographical area or one class of good – it is almost impossible to make a successful claim against another member’s subsidy regime.

Of course, the EU can react unilaterally, imposing UK-only anti-subsidy tariffs as the US’s more muscular trade policy is prone to do, but this will enable the UK to make a more convincing WTO counter case against the EU for unfair treatment – the organisation’s founding principle is to promote equitable relations between members. Furthermore, the EU will be reluctant to risk the diplomatic fallout of losing a case on the back of trying to punish the UK.

The WTO offers the flexible protection the EU never would or could. A non-EU Britain will be at liberty to tinker with its economy in ways the European Commission does not allow, while providing protection from underhand trade policies the same Commission likes to pretend only it can shield the UK from.

It is also worth bearing in mind, if the EU does strike a deal with Britain that does not quite qualify as “bad”, it is likely to come with the attached string of continued payments sent from London to Brussels, whether they are in form of charges for single market “access”, even though every country in the world has access, or the €30bn to €100bn EU exit bill. If it comes to that, the entirely free option of sticking with the WTO should be considered seriously. If the annual cost of the deal exceeds the total cost to British exporters of entering the EU market (approximately £8bn), it is a no brainer.

The WTO option would mean a saving of £14bn per year. Controversially, the Vote Leave campaign lobbied for the extra cash to plug the black hole in the NHS. Whether it is used for this purpose or to keep British exports as competitive as possible, the most important thing to keep in mind is that the monies are ours to choose how to spend.

Customs

The debate over Britain’s future trade relationship with EU is already shifting away from arguments over tariffs. Remain advocates are taking shelter in the more technical world of customs regimes and non-tariff barriers – EU wide common regulations that supposedly enable goods produced at one end of the bloc to comply with standards elsewhere.

The customs issue is heavily exaggerated, but also a subject for constructive debate not Brexit mudslinging. Even if Britain were to take the ill-advised option of staying in the Customs Union, authorities would need to heavily modify procedures at borders and ports: the CU only covers industrial goods and agricultural produce to and from Britain account for a major share UK-EU trade.

Furthermore, deal or no deal, a hard border will have to be put in place between Northern Ireland and the Republic. The so-called soft approach will borrow from Norway’s 1000 mile frontier with Sweden. Norway is not part of the CU. Most of the goods traded between the two countries are duty free, but they still need to be checked during their journey from one to the other. The system in place ensures they are.

Pessimists will point to the British Isles’ contrasting geographical character to European continent. In the context of Brexit, this is an advantage. Look at any EU country and you’ll find multiple low-cost points off access, namely bridges and roads all along each border. The UK meets the rest of world along one hard border and a handful of major ports, it has already priced in the higher cost of importing goods from across the sea. Devising a new generation of customs checks to graft onto the existing system will be straightforward at relatively low cost.

Regulations (aka non-tariff barriers)

For all their recent sins, the Conservatives have put together a sensible plan for Brexit, low on detail going into the negotiations, but specific elsewhere, most importantly in the form of the Great Repeal Bill.

Parliament needs to get on board and prioritise the Bill’s passage so that come April 2019 the UK’s exporting businesses will be facing the same framework of regulations at home as do today and would in any other EU country. Through consultations with exporters on a sector-by-sector basis, the government can then repeal the most bureaucratic elements, cutting red-tape for business while retaining the best possible level of access to the EU market.

A bold future

The other discouraging feature of the Brexit media circus is the lack of foresight. The EU’s stature within the global economy is shrinking rapidly, a fact acknowledged by the European Commission itself. This is reflected in Britain’s trade with the rest of the world eclipsing EU commerce in recent years (see figure 3).

So when we look at the prospects of a no-deal with the European Union, we must not only consider the available solutions and tone down the scaremongering, but also look towards re-orientating British enterprise to capturing the fullest possible potential offered by the outside world’s rapidly growing economy. The EU currently enjoys a complete monopoly over the bloc’s 28 members’ trade policies, Britain will soon run its own trade affairs for the first time in half a century, an opportunity it must not fail to capitalise upon.

So the next time we’re encouraged to object to the Tory’s favourite line, I encourage you to take four points on board. First, to counter the popular argument against the “no deal” posture that we’re “setting the wrong tone”: tone is inconsequential in the context of this negotiation, one which started with belligerent demands from Brussels for £50bn and layer £100bn of the British taxpayer’s hard earned cash. Secondly, as signposted by both sides of the referendum campaign, this is a negotiation towards either a conventional trade agreement, or failing that, no deal at all. The electorate knows this, and indeed, voted for it by a significant margin.

Thirdly, when we look at the prospect of relying upon the WTO as the foundation of our newly repatriated trade policy it is essential to examine the clear benefits and freedoms available: freed up funds can be used to retain the same trade conditions for British exporters selling into the EU. The majority of exporters will see their concerns about the prospect of non-tariff barriers relieved by the safe passage of the Great Repeal Bill. Its enactment is vital.

Finally and arguably most importantly, set against the arch of history and this country’s achievements in all fields of human endeavour, forty-six years’ membership of a dysfunctional trade bloc with delusions of Euro-federalism is but a punctuation mark. Only a clean break with the EU will enable Britain to meet its destiny as an independent global trading nation, protecting its own interests and acting as a model for sound economic and political governance the world over. No deal sounds like a good deal to me.